The move added fuel to a heated debate over whether the Federal Reserve waited too long to respond to signs of a weakening economy.
FedEx shocked investors on Thursday by reporting quarterly results that generally missed expectations and issuing a more cautious outlook, citing an exodus of manufacturing customers no longer willing to pay top prices for expedited shipping.
The company’s shares are expected to open down more than 10% on Friday, wiping out nine straight days of gains. If current indications are accurate, FedEx shares could fall to levels not seen since late June, when the company surprised markets with its fourth-quarter results.
“The slump in the industrial economy is clear. [business-to-business] “FedEx CEO Raj Subramaniam told analysts: Investor Conference Call.
FedEx is often seen as an economic bellwether, with its business cycles serving as a gauge for aggregate demand. The company’s pessimistic assessment comes just as the online commerce sector begins to prepare for the peak seasonal demand for package deliveries ahead of the December holiday season.
FedEx warned that after weaker-than-expected results for the first quarter ended Aug. 31, its full-year revenue growth and adjusted earnings will both be at the low end of its expected ranges, with adjusted earnings rising to $21 a share from $22.
“The quarter was challenging as demand for priority service declined as customers globally opted for cheaper deferred shipping,” investment bank Bernstein acknowledged, reaffirming its outperform rating. FedEx says the change hurts because shipments related to industrial production are its most profitable.
Still, Bernstein expects the cost-cutting progress will eventually be rewarded by the market and urged clients to see any weakness as an opportunity to add to their positions.
U.S. manufacturing contracts for second straight month
Economists have been debating for months whether the Fed will make the same mistake it did after the pandemic, only this time waiting too long to cut rates, rather than waiting too long to raise them amid signs of accelerating inflation.
On Wednesday, Federal Reserve Chairman Jay Powell cut interest rates for the first time since the COVID pandemic spread to the U.S. in March 2020. In addition to this week’s half-point cut, the policy-making FOMC committee expects an additional easing of 1.5 percentage points in total by the end of next year.
That would bring overnight borrowing costs down to around 3.5%, but monetary policy would still likely remain somewhat tight, assuming annual inflation remains at the previously reported level of around 2.5%.
With real interest rates still significantly positive, capital-intensive manufacturers, who must continually invest in property, plant and equipment, are cutting back elsewhere.
“At this point, we do not anticipate a material recovery in the industrial environment for the remainder of the year,” Subrahmanyam told analysts. “The magnitude of the Fed’s rate cut yesterday reflects the weakness of the current environment.”
The FedEx president pointed to recent U.S. manufacturing purchasing managers’ index (PMI), which hit its lowest since December and showed the sector contracting for a second consecutive month.
At the time, Chris Williamson, chief business economist at S&P Global Market Intelligence, said: Warned The outlook for the industrial sector was very bleak indeed.
“The combination of falling orders and rising inventories signals the gloomiest production trends in a year and a half and one of the most worrying since the global financial crisis,” he wrote.
